Financial fraud and the use of ratios in corporate collapse prediction models

Hossari, Ghassan and Rahman, Sheikh F. 2005, Financial fraud and the use of ratios in corporate collapse prediction models, in ABBSA 2005 : Proceedings of the Australian Business and Behavioural Sciences Association Conference, Australasian Business and Behavioural Sciences Association, Cairns, Qld., pp. 283-297.

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Title Financial fraud and the use of ratios in corporate collapse prediction models
Author(s) Hossari, Ghassan
Rahman, Sheikh F.
Conference name ABBSA Conference (2005 : Cairns, Queensland)
Conference location Cairns, Queensland
Conference dates 5-7 Aug. 2005
Title of proceedings ABBSA 2005 : Proceedings of the Australian Business and Behavioural Sciences Association Conference
Editor(s) Athiyaman, Adee
Shehadie, Elias
Publication date 2005
Conference series Australian Business and Behavioural Sciences Association Conference
Start page 283
End page 297
Publisher Australasian Business and Behavioural Sciences Association
Place of publication Cairns, Qld.
Summary This paper highlights the prevalence and extent of financial fraud amongst collapsed corporations. In doing so, it examines the recent spectacular corporate collapses of Parmalat in Europe, Enron and WoridCom in the USA and HIH in Australia. A new methodology that provides empirical evidence to the financial fraud claims found in the literature, is then put forward. The proposed methodology argues that if financial fraud was a possibility amongst collapsed corporations, then two premises ought to be observed in the literature on ratio based multivariate modelling for predicting corporate collapse. First, in the absence of financial fraud, we expect the models to consistently predict corporate collapse with a high degree of accuracy; particularly, as one approaches the incident of collapse. Second, if financial fraud takes place and statement figures are distorted, then we expect the financial ratios, which are the predictor variables in these models, to lose relevance and therefore their use in models will be short-lived. Empirical support from Hossari and Rahman (2004) and Hossari and Rahman (2005) is presented as evidence to the two premises.
ISBN 0646450328
9780646450322
Language eng
Field of Research 150201 Finance
HERDC Research category E1 Full written paper - refereed
Persistent URL http://hdl.handle.net/10536/DRO/DU:30005684

Document type: Conference Paper
Collection: Deakin Graduate School of Business
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